This Supreme Court decision clarifies that special civil actions for certiorari cannot be used to challenge quasi-legislative actions by government agencies like the Department of Finance (DOF) and the Bureau of Internal Revenue (BIR). The Court dismissed the petition filed by Clark Investors and Locators Association, Inc., which sought to annul Revenue Regulations No. 2-2012 (RR 2-2012) imposing VAT and excise tax on the importation of petroleum products into Freeport zones. This ruling underscores the importance of adhering to proper legal remedies and respecting the boundaries between judicial review and legislative or rule-making functions of government bodies.

Fueling Debate: Can Tax Exemptions in Freeport Zones Be Revised by Regulation?

The case of Clark Investors and Locators Association, Inc. v. Secretary of Finance and Commissioner of Internal Revenue arose from a challenge to RR 2-2012, which imposed VAT and excise tax on the importation of petroleum and petroleum products into Freeport or Economic Zones. The petitioner, representing businesses within the Clark Freeport Zone, argued that this regulation unilaterally revoked the tax exemptions granted under Republic Act (RA) No. 7227, the Bases Conversion and Development Act of 1992, as amended by RA No. 9400. These laws aimed to convert former military bases into special economic zones with tax incentives to attract investment and promote economic growth. The central legal question was whether the DOF and BIR, through a revenue regulation, could effectively modify or revoke tax exemptions established by law.

The Supreme Court, however, did not address the substantive issue of tax exemptions. Instead, the Court focused on procedural grounds, specifically the propriety of using a petition for certiorari to challenge the revenue regulation. The Court emphasized that certiorari is a remedy available only against tribunals, boards, or officers exercising judicial or quasi-judicial functions. This is clearly stated in Section 1, Rule 65 of the 1997 Rules of Civil Procedure:

SECTION 1. Petition for certiorari. — When any tribunal, board or officer exercising judicial or quasi-judicial functions has acted without or in excess of its or his jurisdiction, or with grave abuse of discretion amounting to lack or excess of jurisdiction, and there is no appeal, or any plain, speedy, and adequate remedy in the ordinary course of law, a person aggrieved thereby may file a verified petition in the proper court…

According to the Court, the DOF and BIR, in issuing RR 2-2012, were exercising their quasi-legislative or rule-making powers, not judicial or quasi-judicial functions. The crucial distinction lies in the nature of the act: quasi-judicial functions involve determining rights and adjudicating disputes, while quasi-legislative functions involve creating rules and regulations to implement laws. The Supreme Court made this determination based on Section 244 of the National Internal Revenue Code (NIRC), which grants the Secretary of Finance the authority to promulgate rules and regulations for the effective enforcement of the Code. This authority was previously confirmed in BPI Leasing Corporation v. Court of Appeals:

The Court finds the questioned revenue regulation to be legislative in nature. Section 1 of Revenue Regulation 19-86 plainly states that it was promulgated pursuant to Section 277 of the NIRC. Section 277 (now Section 244) is an express grant of authority to the Secretary of Finance to promulgate all needful rules and regulations for the effective enforcement of the provisions of the NIRC…

Building on this principle, the Court reasoned that because RR 2-2012 was issued under Section 244 of the NIRC, it was an exercise of quasi-legislative power and thus not subject to challenge via certiorari. This procedural bar effectively prevented the Court from reaching the merits of the petitioner’s argument regarding the alleged revocation of tax exemptions.

Furthermore, the Court noted that the petition, while styled as a certiorari action, essentially sought a declaration of the unconstitutionality and illegality of RR 2-2012. This characterization placed the petition within the realm of declaratory relief, over which the Supreme Court has only appellate, not original, jurisdiction. This is supported by Section 5, Article VIII of the 1987 Philippine Constitution:

Sec. 5. The Supreme Court shall have the following powers: (1) Exercise original jurisdiction over cases affecting ambassadors, other public ministers and consuls, and over petitions for certiorari, prohibition, mandamus, quo warranto, and habeas corpus. (2) Review, revise, reverse, modify, or affirm on appeal or certiorari as the law or the Rules of Court may provide…

This is a crucial distinction, because the Regional Trial Courts possess exclusive jurisdiction over actions for declaratory relief, as explicitly laid out in Section 1, Rule 63 of the Rules of Court:

SECTION 1. Who may file petition. — Any person interested under a deed, will, contract or other written instrument, whose rights are affected by a statute, executive order or regulation, ordinance, or any other governmental regulation may, before breach or violation thereof, bring an action in the appropriate Regional Trial Court to determine any question of construction or validity arising, and for a declaration of his rights or duties, thereunder.

The Court also invoked the doctrine of hierarchy of courts, emphasizing that while it shares concurrent jurisdiction with lower courts to issue writs like certiorari, this does not grant petitioners unrestricted freedom to choose their forum. The Court emphasized that petitions should generally be filed with the lowest court with appropriate jurisdiction, reserving direct invocation of the Supreme Court’s original jurisdiction for cases with special and important reasons. This principle was previously outlined in Heirs of Bertuldo Hinog v. Hon. Melicor, citing People v. Cuaresrna:

This Court’s original jurisdiction to issue writs of certiorari is not exclusive. It is shared by this Court with Regional Trial Courts and with the Court of Appeals…A direct invocation of the Supreme Court’s original jurisdiction to issue these writs should be allowed only when there are special and important reasons therefor, clearly and specifically set out in the petition.

The Supreme Court noted that the petitioner failed to demonstrate any exceptional or compelling circumstances that would justify a direct resort to the Court, such as cases involving national interest or serious implications. The Court provided examples of exceptional cases from Chamber of Real Estate and Builders Association, Inc. (CREBA) v. Secretary of Agrarian Reform, including cases concerning citizens’ rights, extradition proceedings, and government contracts of significant scale.

The implications of this decision are significant. By focusing on procedural issues, the Court avoided a direct confrontation with the substantive issue of whether a revenue regulation can effectively amend or revoke tax exemptions granted by law. This leaves the question of the validity of RR 2-2012 and its impact on businesses operating in Freeport zones unresolved, at least for the purposes of this particular case. As a result, businesses in similar situations may need to pursue alternative legal strategies, such as filing a case for declaratory relief in the Regional Trial Court.

Moreover, the decision reinforces the importance of adhering to the proper legal remedies and respecting the hierarchy of courts. Litigants must carefully consider the nature of the government action they are challenging and choose the appropriate avenue for redress. Failure to do so can result in the dismissal of their case on procedural grounds, regardless of the merits of their substantive claims. For government agencies, this ruling underscores the importance of exercising their rule-making powers within the bounds of their statutory authority and ensuring that their actions do not exceed the scope of their delegated powers.

FAQs

What was the key issue in this case?	The key issue was whether a petition for certiorari is the proper remedy to challenge a revenue regulation issued by the Department of Finance and the Bureau of Internal Revenue.
What is a writ of certiorari?	A writ of certiorari is a special civil action used to review the actions of a tribunal, board, or officer exercising judicial or quasi-judicial functions. It is used when there is an allegation of lack or excess of jurisdiction or grave abuse of discretion.
What are quasi-legislative functions?	Quasi-legislative functions involve the creation of rules and regulations by administrative agencies to implement and enforce laws. These functions are distinct from judicial or quasi-judicial functions, which involve adjudicating rights and resolving disputes.
What is the doctrine of hierarchy of courts?	The doctrine of hierarchy of courts dictates that cases should be filed with the lowest court with appropriate jurisdiction, reserving direct resort to higher courts for cases with special and important reasons. This promotes judicial efficiency and prevents overburdening higher courts.
What is declaratory relief?	Declaratory relief is a legal remedy that allows a party to seek a court declaration of their rights and obligations under a statute, contract, or other written instrument. It is typically sought before a breach or violation occurs.
What was the impact of RR 2-2012?	RR 2-2012 imposed VAT and excise tax on the importation of petroleum and petroleum products into Freeport or Economic Zones, which was challenged as a revocation of existing tax exemptions. However, the Supreme Court did not rule on the validity of this regulation in this particular case.
What are the tax incentives in Freeport zones?	Freeport zones, like the Clark Freeport Zone, are designed to attract investment by offering tax and duty-free importations of raw materials and capital equipment. Registered businesses within these zones may also be subject to a preferential gross income tax rate.
What should businesses in Freeport zones do in light of this decision?	Businesses should seek legal advice to determine the best course of action, which may include filing a case for declaratory relief in the Regional Trial Court to challenge the validity of RR 2-2012.

In conclusion, the Supreme Court’s decision in Clark Investors and Locators Association, Inc. v. Secretary of Finance and Commissioner of Internal Revenue serves as a crucial reminder of the importance of adhering to proper legal procedures and respecting the distinct roles of different government bodies. While the substantive issue of tax exemptions in Freeport zones remains unresolved in this case, the decision highlights the limitations of certiorari as a remedy and reinforces the principle of judicial hierarchy.

For inquiries regarding the application of this ruling to specific circumstances, please contact ASG Law through contact or via email at frontdesk@asglawpartners.com.

Disclaimer: This analysis is provided for informational purposes only and does not constitute legal advice. For specific legal guidance tailored to your situation, please consult with a qualified attorney.
Source: CLARK INVESTORS AND LOCATORS ASSOCIATION, INC. VS. SECRETARY OF FINANCE AND COMMISSIONER OF INTERNAL REVENUE, G.R. No. 200670, July 06, 2015